Italy: Clamp Down Corruption to Jump Start Growth

Italy’s sluggish growth is at the center of the political debate, as well a key concern for international authorities, given its implications for public debt sustainability. A number of factors can explain Italy’s low growth potential. Most of them refer to the obsolescence of large portions of Italy’s (material and immaterial) infrastructures and of its productive fabric, as well as to the underinvestment in education and R&D. However, another obstacle to Italy’s economic performance is the low effectiveness of decision-making process and bodies (both in the public and the private sector), which many consider the root cause of actual (as well as perceived) corruption.

A systematic approach to estimate the extent of corruption and decision-making ineffectiveness

Roubini Global Economics’ systematic evaluation model (based on Country Insights’ scores) allows a comparison (on a 0 to 10 scale) of the level of corruption and of the inefficiency of the decision-making processes at the international level. This would help gauging what could be the potential economic impact of a serious fight against corruption

Clearly shows that Italy’s investment attractiveness, business environment and effectiveness of political decision-making processes are clearly lower than those of its closest competitors (France, Germany, US, UK, and – often – Spain) and comparable to those of fast-growing emerging economies, which on the other hand can count on other competitive factors, such as low nominal wages and exchange rates kept artificially low. Moreover, the presence of organized crime, the diffusion of corruption and corruption perception (estimated by the rankings of Transparency International, which sees Italy in 69th position over 182) are at alarmingly high levels.

How Corruption Impacts Economic Activity

Corruption can affect economic activity by a number of channels. We will focus on three of them.

1) Corruption dis-incentivizes Foreign Direct Investments

A potential investor, already discouraged by the cumbersome regulation of Italian markets, might decide not to invest in the country if it fears that the only solution to speed-up decision-making processes is by bribing public (or private) officials. Destinazione Italia, the plan produced by Letta’s government and assumed by Renzi’s government to attract Foreign Direct Investments (FDIs), recalled that Italy attracts only 1.6% of international FDIs, a fraction of those directed to France, Germany or the UK. The plan rightly foresees a number of interventions aimed at removing the obstacles to foreign investment, including a reform of civil justice. But its implementation remains, to say the least, uncertain.

2) Corruption Distorts Market Competition

As discussed above, corruption represents an obstacle to foreign firms wishing to invest in Italy. The same way, Italian companies might find more profitable to invest and operate abroad (where the business environment is more attractive) rather than in the domestic market. Moreover, firms unwilling to abide to corruption rules, might decide not to participate in public auctioning or procurement processes, if they perceive that competition is unfair. That way, good companies exit the market over time, reducing the “average” ethical standards of the productive fabric. In this sense, even the simple perception of corruption might have a real impact.

3) Corruption Incentivizes the “Brain Drain”

An environment with unfair competition is a formidable incentive to emigration for those who intend to build their careers exclusively on the basis of their merit and titles. Table 1 shows that Italy’s brain drain is the most intense among Italy’s competitors, even more than that of Spain. But brain drain means value added abroad and subtracted domestically, which partially explains the growth differential. Noble and effective initiatives such as Controesodo (a parliamentary act promoted by MPs from all sides) have helped reduce the fiscal disincentive to remain in Italy. But in order to stop the ‘exodus’ of those fleeing corruption, familism, unfair competition, even more systematic initiatives are necessary to be taken.

Blocking, or severely diminishing the impacts of one or more of these channels would already have a large impact on growth. It is hard to estimate the size of the “corruption phenomenon”. Official sources cite the figure of EUR 60bn a year as the cost of corruption. For comparison, Italy’s spending review efforts is expected to yield just above EUR 30bn of savings in 3 years. This suggests that a serious “war on corruption” could generate vast resources, which can be used to stimulate growth in economic activity.

Is the cavalry finally coming? What Italy has done and is doing to fight corruption.

Despite the alarming size of the phenomenon, Italy has in the past reacted to corruption, and it seems willing to provide a further impulse to the fight, via the creation of the new National Anti-Corruption Agency (ANAC). Choosing Raffaele Cantone, formerly an anti-mafia magistrate, as its President is a sign of the determination by the State to react. Let’s then try to understand what progress has been made in the past, and can be made in the future, in the fight against corruption by speaking with ANAC’s President, Raffaele Cantone.

What’s the state of the art in ANAC’s organization?

A recent Decree from the government has significantly widened the institutional “mission” of ANAC, which has been tasked of controlling every public auctioning and procurement procedure. ANAC now encompasses the competences and has inherited the means and personnel of a previously existing agency (AVCP, Authority for Vigilance on Public Contracts). By 31 December 2014, I have to formulate an organizational plan for the Agency. A very hard, but also stimulating work is ahead of me. At the end of which the Agency should be able to operate at 360 degrees, both on public auctioning and on anti-corruption activities.

How do we know that ANAC won’t remain another empty box, yet a new Agency created to show that the State is aware of some issue, but does not really want to do anything to solve it ?

For ANAC not to remain an empty box we will need to organize it in such a way to be binding, always keeping in mind that our job is not to find out episodes of corruptions (that’s the magistrates’ jobs), but rather stimulate the anti-bodies in the system to prevent corruption from emerging. The signal from politics this time around is not just symbolic, but rather real and effective.

Why do you think that this initiative will be successful, compared to previous experiences? How will you measure your success?

It is difficult to identify measures of effectiveness of a preemptive administrative action. Certainly our success would not be measured by the emersion, or the eventual absence, of new episodes of corruption. In fact, it is known that the discovery of new episodes might be happening by chance and the fact that these episodes are not discovered doesn’t mean that they don’t exist. I believe instead that a good signal could come from an improvement in the international rankings on the perception of corruption. These rankings always show Italy in a very low position. Moving higher in the rankings would provide an encouraging sign that the preemptive action is working.

In practice which instruments will you be given? And which instruments would you like to have?

Our activity will be mainly that of vigilance. We will check if public administrations will respect the norms on the prevention of corruption. Among them, the adoption of the 3-year anti-corruption-plans, the appointment of resident personnel in charge of anticorruption activities, and the rules on integrity of public officers. We will also check the respect of the rules on transparency. In particular it is important that key information is made available by public administration to citizens, for their wider control. We will also check that the norms on public auctioning are respected.

Our limitation consists in the absence of sanctions, which would be able to better stimulate the respect of the above mentioned rules. The Decree in June has established new sanctions, but they might not be enough. By experiencing the application of the norms, we will see what is working and what is not, and in case we would make a new request to Parliament and the government.

How long will it take to become fully operational?

I would say not less than a year, as we will need bit of time to see if the new institutional mission, indicated by the Decree in June, is working. That doesn’t mean that some results cannot be achieved sooner. I actually believe that some of the results are already been achieved. For example, the respect of rules on transparency has already increased thanks to an intensified vigilance on ministries and large local authorities. After our intervention, public communication has improved a lot thanks to do so called aim to “Transparent Administration.” I am truly convinced that the increase in effective transparency makes it harder for corruption episodes to occur. Corruption is a crime that is made in the dark, and the light of transparency makes it harder to commit it.

Are there bodies similar to ANAC at the international level? Have they worked?

In many foreign countries there exist anticorruption authorities. There are many types of them and well diversified. By reading reports and discussing with colleagues at international level, I verified that foreign authorities might have the powers of the police or even of the judiciary. At the opposite, in some cases these authorities are directly linked to ministries. In France, for example, the anticorruption authority is linked to the Ministry of Justice. In Italy the Agency is an independent authority. It is appointed by the government but needs to receive the votes from two thirds of the components of the parliamentary commissions, and it lasts 6 years. Therefore more than what a government can last. In the sense, it is a novelty at the international level. The experience of foreign authorities, although so diversified, seems encouraging. It seems they have obtained good results in the fight against corruption. At least this is what emerges from the reports by international organizations.

Where do you believe that corruption mostly lies?

Corruption stems from bureaucracy that doesn’t work and poses obstacles. Some people believe that these obstacles can be overcome by corrupting public officers or “putting them on their payroll”. For this reason, an intelligent simplification of the procedures my help fight corruption. Simplification does not mean eliminating controls, but making faster and more efficient controls. Very often, complicated rules are at the origin of corruption.

Where does the fight against corruption begin?

It is not about finding a place to start. Fight against corruption requires synergies, which eventually will take to verifiable results. A good preemptive action must be accompanied by a repression that works. Last but not least, it is necessary to begin a cultural fight. For too long in Italy corruption has been an undervalued phenomenon, or sometimes considered a necessity to overcome insurmountable bureaucratic obstacles. In some cases the corruptor, like the tax evader, has been considered a very clever person able to circumnavigate the obstacles. It is imperative instead that the idea emerges that corruption is the absolute evil, like mafia. Both of them cause damages to citizens because they made the economic system much weaker and much less prone to respect the rules of competition, as explained above.

Considering your anti-mafia experience, do you believe it is possible to win corruption in Italy without, at the same time, defeat (or reduce the relevance of) mafia?

Mafia and corruption are two typical evils of Italian society. But they do not always coexist. It is possible that where mafia is stronger, corruption is more pervasive. The mafiosi have an “additional strong argument’ to spend with the vulnerable public officer. Besides money, it can intimidate. However, not always the presence of corruption implies the presence of mafia. In some cases, the presence of corruption is due to the presence of political/business lobbies, not necessarily associated to mafia. The episodes of corruption emerged in Milan, with the Expo, and in Venice, with MOSE, prove that important corruption episodes my happen even without mafia. It is true that by making mafia less strong corruption we’ll be diminished, but not necessarily eliminated.

Very often, when speaking about corruption, one tends to think to the receiver of the bribe (or other utility), i.e. the public officer or the politician. But it is less likely to think about the “giver” of the bribe (or other utility), typically from the private sector. But this phenomenon requires both the corruptor and the corrupted (official). What can the Agency do in order to encourage more virtuous behaviors also by the private sector? To make people understand that “shortcuts” eventually don’t pay off?

You are right. Corruption is the bilateral relationship in the situation of contractual parity among the parts. Selling services by public officers is morally wrong, but it’s equally morally wrong the action of those buying the exercise public functions. This is a piece of the cultural fight I was discussing above. On this, the Agency may play a very important role, by making public statements and using its authoritative messages. We shall speak in schools and universities to try to convince people that corruption cause damage not just to the respectability of public administration, but also the whole society. It is an effort I am making personally, by running the risk of an excessive public exposition. But I am trying to speak everywhere to make people understand that fight against corruption is not necessarily a lost war.

Could you make examples of recent virtuous behaviors from the private and public sectors that show the existence of corruption anti-bodies also in Italy?

Every time that a corruption episode is discovered, there is the indirect proof of a virtuous behavior. The police officer arresting a corrupted official is also part of the public administration. Very often these people have to proceed against colleagues in the same office. It is a clear demonstration that there is a large healthy component of Italian society, and on that component we will have to work in order to invert the trend on the fight against wrongdoing.